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June 23, 2015 - Phil Hodgen

Expatriating without filing FBARs

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This post is for people who want to relinquish their U.S. citizenship or their green card, but they have not filed FBARs. They are concerned that expatriating will trigger massive FBAR penalties.

It is possible to expatriate, not file FBARs, and certify to the IRS that you have complied with your tax obligations. It is not necessarily a good idea, however.

Summary

An expatriate must certify whether he has complied with all tax obligations under Title 26 of the United States Code. FBAR filings are required under Title 31. Therefore, the expatriate does not need to certify whether he is up to date with FBAR filings.

Three ways to be a covered expatriate

When you relinquish your U.S. citizenship, you will be a “covered expatriate” if:

  • Your net worth exceeds $2,000,000;
  • Your average net Federal income tax liability for the prior 5 years exceeded $160,000 (for expatriations in 2015); or
  • You do not certify under penalty of perjury that your prior 5 years of tax obligations are up to date.

For this article, we will focus on the third test: The certification requirement.

Where to find the certification statement

You will find the certification statement on Form 8854, Part IV, Line 6. This is on Page 2. Line 6 says:

“Do you certify under penalties of perjury that you have complied with all of your tax obligation for the 5 preceding tax years (see instructions)?”

If you say “no” to the question, you will automatically be a covered expatriate. In addition, you are telling the IRS that they really should audit your last 5 years of returns, because you did not meet all your tax obligations and they are certain to find something wrong.

Legal explanation of the certification statement

Here is exactly what you need to certify when you check the “yes” box for Form 8854, Part IV, Line 6, and say that your “tax obligations” are all up-to-date.

The instructions for Form 8854 says the following:

Check the “Yes” box if you have complied with your tax obligations for the 5 tax years ending before the date on which you expatriated, including but not limited to, your obligation to file income tax, employment tax, gift tax, and information returns, if applicable, and your obligation to pay all relevant tax liabilities, interest, and penalties.

The instructions do not mention FBARs specifically, but the instructions also say that tax obligations are not limited to the listed items. In other words, the instructions do not help.

Internal Revenue Code Section 877A governs the taxation of expatriates. Section 877A defines a covered expatriate:

The term “covered expatriate” means an expatriate who meets the requirements of subparagraph (A), (B), or (C) of section 877(a)(2).”

Internal Revenue Code Section 877(a)(2)(C) says:

“…such individual fails to certify under penalty of perjury that he has met the requirements of this title for the 5 preceding taxable years or fails to submit such evidence of such compliance as the Secretary may require.”

Note the phrase “this title”.

Federal law is in the United States Code. The United States Code is divided into different titles.

When Section 877(a)(2)(C) says you must certify you met the requirements of “this title”, it means you must certify that you satisfied everything in the Internal Revenue Code — Title 26 of the United States Code.

The FBAR filing requirement is in Title 31 of the United States Code. Specifically, Section 5314(a) says:

“Considering the need to avoid impeding or controlling the export or import of monetary instruments and the need to avoid burdening unreasonably a person making a transaction with a foreign financial agency, the Secretary of the Treasury shall require a resident or citizen of the United States or a person in, and doing business in, the United States, to keep records, file reports, or keep records and file reports, when the resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial agency.”

The “Secretary” referred to is the Secretary of the Treasury, and the report that is required is Form FinCEN 114.

You are asked to certify that your tax filings under Title 26 are up to date. Since the FBAR is required under Title 31, you are not required to certify that your FBAR filings are up to date.

You can do it, but is this a smart move?

If your FBARs are not up to date, you can still certify that you complied with all your tax obligations on Form 8854, and answer the question on Line 6 with a “yes”. This prevents you from being a covered expatriate, even though you did not file FBARs.

This is not necessarily the best strategy, however. My suggestion to people who are expatriating (and indeed, for anyone with tax problems) is to clean up messes permanently. There are a number of ways to fix late FBAR filings when you are expatriating, ranging from the “just file them” strategy to the “streamlined procedures and variations on them” to the voluntary disclosure program. If you have the opportunity to clean up the FBAR filings and eliminate future risks, why not do so?

Of course, under current law the FBAR penalty risk expires six years after the date of filing. So you might choose the Dirty Harry strategy (“Do you feel lucky, punk? Well, do you?”). But I vastly prefer the Workaholics strategy — “You only YOLO once.”

Disclaimer

This is not legal advice, so hire someone to help you.

Send me your questions!

Phil.

Expatriation